COURT FILE NO.: CV-19-623570
DATE: 20201106
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
2619506 Ontario Inc.
Plaintiffs
– and –
2082100 Ontario Inc., Samuel Davis and Farhan Absar
Defendants
AND BETWEEN:
2082100 Ontario Inc.
Plaintiffs by Counterclaim
- and –
2619506 Ontario Inc., Vaishali Paralekar and Jayesh Paralekar
Defendants by Counterclaim
COUNSEL:
A. Hora, for the Plaintiffs
M. Diegel, for the Defendants
M. Diegel, for the Plaintiffs by Counterclaim
A. Hora, for the Defendants by Counterclaim
HEARD: November 3, 2020
o’bRIEN, j.
REASONS FOR JUDGMENT
[1] This is a motion for summary judgment brought by the Plaintiff company, which entered into a franchise agreement with the Defendant company franchisor, 2082100 Ontario Inc. (“Franchisor”). In May 2019, the Plaintiff served a notice of rescission of the franchise agreement under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Act”) on the basis of what it submits was inadequate disclosure in the franchise disclosure documents provided by the Franchisor. The Plaintiff seeks compensation pursuant to s. 6(6) of the Act, as well as declarations that the Defendants, Samuel Davis and Farhan Absar, are “franchisor’s associates” as defined in the Act, such that they would face personal liability. It also seeks dismissal of the Counterclaim, in which the Defendants allege that the Plaintiff, through its President, Vaishali Paralekar, removed equipment from the franchise premises.
[2] The Plaintiff and the Franchisor entered into a franchise agreement on May 7, 2018 (the “Agreement”). By the Agreement, the Plaintiff became a franchisee of the Franchisor’s “Fit for Life” chain of quick service restaurants. The restaurant for the Plaintiff’s franchise was located at the Scarborough campus of the University of Toronto. Although the location was marketed and sold to the Plaintiff as a Fit for Life restaurant, it previously had been a Treats Café restaurant, which was run by the same group of companies as the Franchisor.
[3] Prior to signing the Agreement, in April 2018, Ms. Paralekar met with Farhan Absar, a representative of Fit for Life, to discuss her franchise application. At a subsequent meeting, Mr. Absar provided her with Franchise Disclosure Documents (“FDD”s) for both Treats Café and the Franchisor. The Franchisor’s FDD failed to include the company’s most recent financial statements. The only financial statements included in the FDD were unaudited statements from 2016, over two years earlier. The Franchisor’s FDD was executed by the Defendant, Samuel Davis, who was the sole director and shareholder, as well as the President and CEO of the Franchisor.
[4] The Plaintiff began operating the Fit for Life restaurant at the end of August, 2018. Ms. Paralekar states that once she began operations, the sales were much lower than expected. After two months of operating, she decided the restaurant was not sustainable and that she would sell the francise. She then began efforts to sell the franchise while continuing to operate the restaurant. Ultimately on May 13, 2019, her counsel served the notice of rescission.
[5] The parties have advised that they have reached an agreement on the amounts that would be owed to the Plaintiff, if successful, pursuant to s. 6(6) of the Act. Therefore, on this motion I am required to address liability only. The specific issues on the motion are:
Is there a genuine issue requiring a trial?
Was the Plaintiff entitled to rescind the Agreement pursuant to s. 6(2) of the Act?
Were Samuel Davis and Farhan Absar “franchisor’s associates” as defined in the Act?
[6] For the reasons that follow, I conclude that there is no genuine issue requiring a trial. On the record before me, I am able to find the necessary facts and apply the relevant legal principles to resolve the dispute. I find that the Plaintiff was entitled to rescind the Agreement pursuant to s. 6(2) of the Act, in view of the failure of the Franchisor’s FDD to include any financial statements other than unaudited financial statements from 2016. Finally, I am also able to make the necessary factual findings to conclude that both Samuel Davis and Farhan Absar fall within the definition of “franchisor’s associate” in the Act.
Is there a genuine issue requiring a trial?
Principles of Summary Judgment
[7] Pursuant to r. 20.04(2) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, the court shall grant summary judgment if it is satisfied that there is no genuine issue requiring a trial. According to Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 49,
There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.
[8] The Supreme Court continues, at para. 50, “the standard for fairness is not whether the procedure is as exhaustive as a trial, but whether it gives the judge confidence that she can find the necessary facts and apply the relevant legal principles so as to resolve the dispute.”
[9] The responding party on a motion for summary judgment is required to put its “best foot forward” or risk having summary judgment awarded against it: Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONSC 1200 at para. 26, aff’d 2014 ONCA 78, leave to appeal dismissed, 2015 CanLII 39803 (SCC). Generally, the court is entitled to assume that the record on a motion for summary judgment contains all the evidence the parties would present at trial.
Analysis
[10] There is no genuine issue requiring a trial in this case. There is no dispute about the primary facts on which I am able to decide the issues in dispute. Specifically, on the question of whether the Plaintiff was entitled to rescind the Agreement, there is no dispute about the contents of the Franchisor’s FDD, including that it failed to include any financial statements other than unaudited statements from 2016.
[11] Although the Plaintiff has raised other complaints about the information provided to her by Mr. Absar, I do not need to reach any conclusions on these to determine the issue in dispute. Specifically, Ms. Paralekar has alleged that Mr. Absar refused to provide her with sales numbers specific to her new location. Mr. Absar disputes this version of events and maintains in any event that sales numbers from the Treats Café previously in the location would have been irrelevant. As further detailed below, in my view, even if Mr. Absar’s evidence on the points in dispute were to be accepted, the FDD provided to the Plaintiff was sufficiently inadequate that the Plaintiff was entitled to rescind the Agreement.
[12] With respect to the other Defendants, there is no dispute that Mr. Davis was the sole officer and director, as well as the President and CEO of the Franchisor, nor that he signed the FDD on behalf of the Franchisor. These facts are sufficient to determine that he was a “franchisor’s associate.” While there is some dispute about Mr. Absar’s precise role within or connection to the Franchisor, I find that I am able to resolve that dispute and make those findings based on Mr. Absar’s own answers on cross-examination, as well as on representations in the Defendants’ own documents. I am confident that I can find the necessary facts and apply the legal principles to this issue.
[13] Finally, the Defendants/Plaintiffs by Counterclaim have not introduced any evidence in support of the Counterclaim. Ms. Paralekar has provided evidence that she did not take any inventory, nor did she remove any restaurant equipment. The Plaintiff sought in this motion an order dismissing the Counterclaim and the Defendants/Plaintiffs by Counterclaim had an obligation to put their best foot forward. They have not provided any basis to substantiate the Counterclaim. I therefore am able to dismiss it.
Was the Plaintiff entitled to rescind the Agreement pursuant to [s. 6(2)](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html#sec6subsec2_smooth) of the [Act](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html)?
[14] Turning to the next issue, I conclude that the Plaintiff was entitled to rescind the Agreement because of the entirely deficient disclosure provided by the Franchisor.
[15] Pursuant to s. 5 of the Act, a franchisor has an obligation to provide prospective franchisees with a disclosure document prior to the signing of the franchise agreement and the payment of any consideration to the franchisor (with some exceptions). Section 5 sets out required contents of the disclosure document. Section 6 of the Act permits a franchisee to rescind a franchise agreement within 60 days if the franchisor failed to provide the disclosure document or the disclosure document did not meet the requirements of s. 5. In addition, s. 6(2), relied on here, permits a franchisee to rescind the franchise agreement within two years if the franchisor never provided the disclosure document. Subsection 6(2) reads:
(2) A franchisee may rescind the franchise agreement, without penalty or obligation, no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document.
[16] The Court of Appeal has emphasized repeatedly that the Act is intended to redress the imbalance of power between franchisors and franchisees. It protects the interests of franchisees by imposing rigorous disclosure obligations on franchisors, with strict penalties for non-compliance: Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, at para. 26; Mendoza v. Active Tire & Auto Inc., 2017 ONCA 471, at paras. 13, 26; 6792341 Canada Inc. v. Dollar It Limited, 2009 ONCA 385, at para. 13.
[17] Two guiding principles have emerged from the Court of Appeal with respect to the interpretation of s. 6(2) in particular. The first is that non-compliance with s. 5 of the Act does not always provide sufficient grounds for rescission under s. 6(2). As set out in Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, at para. 46: “[a] franchisee that receives imperfect disclosure does not necessarily stand in the same position as a franchisee that was ‘never provided with a disclosure document.’ In Imvescor, at para. 73, this court warned that conflating those two scenarios would frustrate clear legislative intent….”
[18] On the other hand, the Court of Appeal also has stated that a purported disclosure document may be so deficient as to effectively amount to a complete lack of disclosure, thereby permitting rescission under s. 6(2): Raibex, at para. 47.
[19] In the circumstances of this case, I consider the disclosure document provided to have been so deficient as to amount to a complete lack of disclosure. This is because the Franchisor did not provide any meaningful financial disclosure to the Plaintiff. Although the Franchisor provided the FDD to Ms. Paralekar in May 2018, the only financial statements it provided were unaudited statements from 2016, over two years earlier.
[20] The Act and its regulations specifically require that updated financial information be provided. Paragraph 5(4)(b) of the Act requires the disclosure document to contain “financial statements as prescribed.” Section 3 of Regulation 581/00 under the Act provides that every disclosure document is required to include either an audited financial statement for the most recently completed fiscal year or a financial statement for the most recently completed financial year prepared in accordance with generally accepted accounting principles. There is an exception to this. Pursuant to s. 3(2), if 180 days have not yet passed since the end of the most recently completed fiscal year and a financial statement has not been prepared and reported for that year, the disclosure document is required to include a financial statement for the previous year.
[21] In this case, the fiscal year ended in January. There was a clear requirement in the Regulation for the Franchisor to include the 2017 financial statements. The Franchisor failed to do so. Further, there is no evidence as to whether, by May 2018 when the Agreement was entered into, the 2018 financial statements were available. However, neither the 2017 nor 2018 financial statements were ever provided to the Plaintiff.
[22] I note that, apart from the unaudited 2016 financial statements (as well as information regarding licence fees and other fees and payments that would be owed by the franchisee), there was no other financial information provided to the Plaintiff. Even if I accept the Defendants’ position that the sales information from the Treats Café previously in the location was irrelevant, the fact is that the Plaintiff did not receive any historical sales information for the location. Ms. Paralekar therefore was left to make a decision about whether to invest in the franchise without any updated financial information.
[23] Financial statements are vital piece of information for potential franchisees. As set out in Mendoza, at para. 33: “Financial statements are clearly an extremely significant component of the information a prospective franchisee requires in order to assess the viability of the franchisor’s franchise operations and the safety and security of becoming a franchisee in that franchisor’s system.” Similarly, in Dollar IT, the Court of Appeal stated at para. 35: “When one considers that the purpose of disclosure is to enable a prospective franchisee to make an informed decision about whether or not to invest in a franchise, financial disclosure is of the utmost importance.”
[24] The Defendants do not seriously dispute that, as a result of the missing financial statements, the FDD was so deficient as to amount to no disclosure at all. The Defendants submit that Raibex put greater emphasis than had previous cases on the question of whether the potential franchisee is able to make a properly informed investment decision. However, they do not seriously contend that the Plaintiff in this case was able to make a properly informed investment decision. As set out in Dollar IT, financial disclosure is of the “utmost importance” in enabling a prospective franchisee to do so. I find that in the circumstances of this case, the absence of any recent financial information rendered the FDD so deficient as to amount to no disclosure at all. As a result, the Plaintiff was entitled to rescind under s. 6(2) of the Act.
Were Samuel Davis and Farhan Absar “franchisor’s associates” as defined in the [Act](https://www.canlii.org/en/on/laws/stat/so-2000-c-3/latest/so-2000-c-3.html)?
[25] On the final issue, I find that both Samuel Davis and Farhan Absar fall within the definition of “franchisor’s associate.” Under s. 6(6) of the Act, a franchisor and its “associates” are liable to a franchisee for prescribed payments and losses following a valid rescission. The definition of “associate,” found at s. 1(1) of the Act, has two requirements: the first part addresses control of or by the franchisor and the second part requires either involvement in the grant of the franchise or operational control over the franchisee. It reads:
“franchisor’s associate” means a person,
(a) who, directly or indirectly,
(i) controls or is controlled by the franchisor, or
(ii) is controlled by another person who also controls, directly or indirectly, the franchisor, and
(b) who,
(i) is directly involved in the grant of the franchise,
(A) by being involved in reviewing or approving the grant of the franchise, or
(B) by making representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise, or
(ii) exercises significant operational control over the franchisee and to whom the franchisee has a continuing financial obligation in respect of the franchise.
[26] In oral submissions, counsel for the Defendants did not strenuously pursue the position that Mr. Davis was not a franchisor’s associate. Mr. Davis easily meets the first part of the test. It is undisputed that he is the sole director and shareholder, as well as the President and CEO of the Franchisor. Therefore, he directly controls the Franchisor. With respect to the second part of the test, Samuel Davis was “directly involved in the grant of the franchise” in that he signed the FDD disclosure certificate. The FDD is the formal representation to prospective franchisees about the franchise. It contains numerous representations intended to encourage investment in Fit for Life -- for example, representations about Fit for Life’s focus on “high quality food items,” how they will differentiate themselves from competitors, and their “keys to success.” It states that their first location “was an immediate success.” By certifying the truth and completeness of the information contained in the disclosure document, Mr. Davis made “representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise, or otherwise offering to grant the franchise” as set out in paragraph (b)(i)(B) of the definition.
[27] I also conclude that the Defendant, Mr. Absar was a “franchisor’s associate” under the Act. The Defendants submit that Mr. Absar was not an employee of the Franchisor and therefore was not controlled by the Franchisor. In addition, the Defendant submits that Mr. Absar’s representations to the Plaintiff did not amount to representations “for the purpose of granting the franchise,” since he was not involved in the decision of granting the franchise. Instead, there were several subsequent layers of bureaucracy before that determination would be made.
[28] I find that Mr. Absar meets the first part of the definition for “franchisor’s associate.” Although Mr. Absar’s answers on cross-examination regarding the relevant corporate structure were in parts incomplete or confusing, the Defendants’ own documents ultimately reveal that Mr. Absar was controlled by “another person who also controls directly or indirectly the franchisor.”
[29] The Franchisor was part of a group of companies each of which represented a different franchise brand, including Treats Café and Fit for Life. The group was called the Davis Group, after Samuel Davis. According to the Franchisor’s own organizational chart, and according to Mr. Absar’s e-mail signature, he was the Director of Franchising and Development for the Davis group of companies, including Fit for Life. Although Mr. Absar testified that he was an employee of Dakin News Systems Inc., for which the franchise was INS Market, this company was also part of the Davis Group of companies, all owned and controlled by Mr. Davis. Indeed, the Franchisor’s own FDD seems to conflate the Franchisor with INS Market, stating “the Franchisor began to franchise under the trade names ‘INS’ and ‘INS Market’….”.
[30] The Plaintiff states that he received his instructions, including with respect to advertising and generating leads for Fit for Life, from the executive team of the Davis Group. Although the “Davis Group” was not itself a corporation, Samuel Davis was the head of the Davis Group and he owned all of the Davis Group of companies. In these circumstances, Mr. Absar was controlled by a person, Mr. Davis, who controlled the Franchisor.
[31] Mr. Absar also meets the second part of the definition, as his role and actions fall squarely within (b)(i)(B) of the definition, in that he made “representations to the prospective franchisee on behalf of the franchisor for the purpose of granting the franchise, marketing the franchise or otherwise offering to grant the franchise.” Mr. Absar advertised Fit for Life franchises to generate leads for new franchisees. He then would meet with potential franchisees to discuss their application. He admits that he was involved in the marketing and advertising of the specific franchise location in issue and that he had personal communications with Ms. Paralekar about the franchise. Ms. Paralekar’s undisputed evidence is that she met with Mr. Absar at first to discuss her application, and, at a subsequent meeting, he provided her with the Franchisor’s FDD.
[32] On the plain wording of the statute, and contrary to the Defendants’ submission, Mr. Absar did not need to have control over the decision to grant the franchise. He only needed to make representations for one of the purposes listed: granting the franchise, marketing the franchise, or otherwise offering to grant the franchise. At a minimum, Mr. Absar made representations for the purpose of marketing the franchise and therefore meets the definition of franchisor’s associate.
Disposition
[33] The motion is allowed. I find that the Plaintiff’s notice of rescission was valid and the Plaintiff therefore is entitled to compensation pursuant to s. 6(6) of the Act. Further, Mr. Davis and Mr. Absar are franchisor’s associates. Finally, the counterclaim is dismissed. The parties have advised that they have reached an agreement as to costs. Therefore, I do not make any order as to costs unless a provision for costs as agreed upon by the parties is included in the draft order provided to me.
Date: November 6, 2020